Executive summary
Outlook: ignore the false perceptions – look at specific dynamics
We have examined various perceptions of the HDD industry to assess whether they are based
on stereotypes or reality. In particular, we find that HDD stocks tend to trade on concerns
about inventory levels, aggressive pricing, alternative technologies (e.g., NAND), and
seasonality. However, our analysis suggests that high inventory levels and aggressive pricing
are what affect long-term valuations of HDD stocks – both eventually lead to lower earnings.
We find seasonality and NAND less important. Seasonality does exist, but we see it as a
short-term impact; it does not affect long-term trends. We also find that while recent concerns
about NAND have influenced share prices during certain periods, to date, NAND itself has had
zero impact on the notebook market or on Western Digital’s and Seagate’s results.
After answering questions on what really matters to HDD stocks, we turn to concerns about
the overall economy to assess how the HDD industry and HDD stocks react in a recessionary
environment. Our analysis indicates that over the past 30 years, HDD revenue has not been
correlated to overall IT spending. Plus, over the past 20 years, HDD stocks have not been
correlated to the overall equity markets. The main reason for this lack of correlation: industryspecific
dynamics in the late 1990s caused declining revenue, earnings, and stock prices
while the rest of the IT market was growing and stock prices were rising. However, looking
at HDD revenue and stock prices over the past five years, we do find a correlation. While the
economy has historically not mattered to HDD stocks, we think it is fair to say that it probably
does today. Still, history suggests that specific dynamics within the HDD industry will remain
a more significant driver of HDD results and stock price volatility than the overall market.
We also address the stereotype of HDD stocks being a bad investment. We find that
while over the past 20 years HDD stocks have underperformed the market, since Seagate’s
IPO in December 2002, both Western Digital and Seagate have outperformed the overall
market, with Western Digital being the clear outperformer (up 350% during this period).
We have updated our May 2007 analysis on the debate between HDDs and SSDs in
notebooks. Many of the key themes discussed in our FITT report “HDD versus NAND:
Cache saves a lot of cash” remain valid today; however, we decided to update our price per
gigabyte and capacity estimates to see how our expectations fared.
The key difference between May 2007 and today: average capacity per laptop. Average
capacity per laptop grew much faster than we expected from 2006 to 2007 – 60%. As a
result, average capacity per laptop drive was roughly 110GB in 2007; we expected 80GB.
We continue to assume 30% average capacity growth per year in our model; however, our
estimates for average notebook capacity in 2010 and 2012 have moved higher to 240GB and
400GB due to last year’s growth.
Also, NAND prices are actually higher today then they were in May 2007. However, our
notebook penetration model had assumed a slightly higher dollar per GB cost, so we have
tweaked our estimates. The end result – we still expect limited impact from SSDs in the
notebook market, with SSDs cannibalizing roughly 2-4 percentage points of growth in 2012,
vs. an expected five-year CAGR of 16% for this segment of the HDD market.

In the final section of our report, with a bit of history for perspective, we outline our forecasts
for each of the four HDD segments (desktop, mobile, enterprise and SFF). We also share our
thoughts on the three HDD companies under our coverage and update competitor profiles.

Table of Contents
Executive summary ........................................................................... 3
Outlook: ignore the false perceptions – look at specific dynamics ...........................................3
Valuation ..................................................................................................................................4
Risks ........................................................................................................................................4
Perception versus reality .................................................................. 5
What typically moves HDD stocks?..........................................................................................5
Which concerns really matter?..................................................................................................6
How is the HDD market correlated to the overall IT market? ...................................................7
Haven’t HDD stocks historically been a bad investment?.......................................................10
An update on SSDs vs. HDDs ......................................................... 11
Price per gigabyte ...................................................................................................................11
Capacity growth continues unabated......................................................................................13
Notebook potential for SSDs: not much risk to HDD market..................................................15
The HDD market .............................................................................. 18
A bit of history on the HDD industry .......................................................................................18
Industry dynamics since the mid-1970s..................................................................................19
Areal density growth...............................................................................................................20
HDD industry segments..........................................................................................................20
Desktop..................................................................................................................................21
Mobile....................................................................................................................................22
Enterprise...............................................................................................................................24
Small form factor drives..........................................................................................................25
Companies and competitors .......................................................... 27
Seagate Technology (Hold, $21.82, $26 PT) ...........................................................................27
Western Digital (Buy, $31.21, $37 PT) ....................................................................................28
Hutchinson Technology (Hold, $17.04, $20 PT) ......................................................................29
HDD competitors....................................................................................................................30